Moody’s warned yesterday “the next Administration must grapple with widening budget deficits…the Administration’s tax and spending policies will affect the size of future budget deficits and the expected decline in fiscal strength, which could have a significant effect on sovereign credit profile.”
The ratings company further stated “the debt dynamics would be increasingly unsustainable and inconsistent with its current rating if no policy actions are taken to course correct.”
Moody’s stated that it will take no action until the election where upon “fiscal policy will be front and center.” Is this Moody’s attempt to stay above the political fray?
Will Washington heed these warnings? As noted several times, unfortunately Washington only reacts when a crisis occurs. The complacency in the markets is great, believing that there is an unlimited demand for most sovereign credits, especially the US Treasury which is the global benchmark.
Equites erased losses yesterday after consumer confidence unexpectedly fell the most in three years, the result of waning job optimism, shaking the soft-landing conviction. As widely disseminated, monetary policy is primarily focused on jobs. At this juncture “bad is good” for equities—specifically mega cap techs—as it increases the odds of more dovish monetary policy.
The yield curve steepened nominally on the data.
What will happen today?
Last night the foreign markets were mixed. London was up 0.30%, Paris down 0.28% and Frankfurt down 0.39%. China was up 1.16%Japan down 0.19% and Hang Seng up 0.68%.
Futures are flat. The 10-year is off 6/32 to yield 3.76%.
Kent Engelke
Chief Economic Strategist Managing Director
The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.
